Andrey Malenko

Timing Decisions in Organizations: Communication and Authority in a Dynamic Environment

We consider a problem where an uninformed principal makes a timing decision interacting with an informed but biased agent. Because time is irreversible, the direction of the bias crucially affects the agents ability to credibly communicate information. When the agent favors late decision making, full information revelation often occurs. In this case, centralized decision making, where the principal retains authority and communicates with the agent, implements the optimal decision-making rule. When the agent favors early decision making, communication is partial, and the optimal decision-making rule is not implemented. Delegation adds value when the bias is for early decision making, but not for late decision making.

Optimal Dynamic Capital Budgeting

I study optimal design of a dynamic capital allocation process in an organization in which the division manager with empire-building preferences privately observes the arrival and properties of investment projects, and headquarters can audit projects at a cost. Under certain conditions, a budgeting mechanism with threshold separation of financing is optimal. Headquarters: (1) allocate a spending account to the manager and replenish it over time; (2) set a threshold, such that projects below it are financed from the account, while projects above are financed fully by headquarters upon an audit. Further analysis studies when co-financing of projects is optimal and how the size of the account depends on past performance of projects.This paper studies optimal design of a capital allocation system in a firm in which the division manager with empire-building preferences privately observes the arrival and properties of investment projects, and the headquarters is able to audit each project at a cost. Under certain conditions, the optimal system takes the form of a budgeting mechanism with threshold division of authority. Specifically, the headquarters: (i) allocates a spending account to the manager at the initial date and accumulates it over time; (ii) sets a threshold on the size of individual projects, such that all projects below the threshold are delegated to the manager and financed out of her spending account, while all projects above the threshold are audited and financed fully by the headquarters. The model is extended in several directions, including multiple audit technologies, multiple project categories, and the possibility of renegotiation.

The Timing and Method of Payment in Mergers when Acquirers are Financially Constrained

This paper studies the interaction between takeover activity, means of payment (cash versus stock), and premiums in a dynamic real-options model. The timing of takeovers and the equilibrium bids in contests with multiple bidders are driven by three factors: synergies of the bidder with the target, cash constraints of the bidder, and cash constraints of its competitors. The model produces many testable hypotheses, both novel and consistent with existing studies. First, contests in stock extract more surplus from the bidder, so higher-synergy bidders benefit from approaching targets when they are smaller and acquiring them in cash. This self-selection by bidder quality can explain higher takeover premiums in cash versus stock deals in the sample of takeovers. Second, cash constraints need not have a monotonic effect on incentives of bidders to approach the target. Finally, high deal activity can be caused by shocks not only to valuations but also to cash constraints.Although acquisitions are a popular form of investment, the link between firms’ financial constraints and acquisition policies is not well understood. We develop a model in which financially constrained bidders approach targets, decide how much to bid and whether to bid in cash or in stock. In equilibrium, financial constraints do not affect the identity of the winning bidder, but they lower bidders’ incentives to approach the target. Auctions are initiated by bidders with low constraints or high synergies. The use of cash is positively related to synergies and the acquirer’s gains from the deal and negatively to financial constraints. Received March 3, 2016; editorial decision August 18, 2017 by Editor Itay Goldstein. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Advising the Management

We study the optimal size and composition of an advisory committee when shareholders differ in preferences and beliefs and strategically acquire and communicate information. If shareholders and management have similar objectives but disagree due to different beliefs, and information is cheap, the optimal advisory body includes all shareholders. Conversely, if agents have conflicting preferences or information is sufficiently costly, the optimal advisory body is a strict subset of shareholders. Thus, advisory voting (board) is optimal in the former (latter) case. Similar implications hold if the committee also has authority, but unlike purely advisory committees, committees with authority are more diverse.

Asymmetric Information and Security Design Under Knightian Uncertainty

An issuer, privately informed about the distribution of the projects cash flows, raises financing from an uninformed investor through a security sale. The investor faces Knightian uncertainty about the distribution of cash flows and evaluates each security by the worst-case distribution at which she could justify it being offered by the issuer. We characterize the generically unique equilibrium of this non-Bayesian signaling game. Both standard outside equity and risky debt are issued by different issuer types in equilibrium, providing a common foundation for two most widespread financial contracts. The equilibrium security depends on the degree of uncertainty and the nature of private information. If private information concerns a new project and uncertainty is sufficiently high, outside equity prevails in equilibrium. When uncertainty is sufficiently small, the equilibrium typically features risky debt and never outside equity. If private information concerns assets in place, equity is never issued, irrespective of the level of uncertainty, and the equilibrium security is (usually) risky debt.

Auctions with Endogenous Initiation

We study strategic initiation of a first-price auction by potential buyers with changing valuations and the seller. This problem arises in auctions of companies and asset sales, among other contexts. Each buyer can communicate his interest to the seller, thereby triggering an auction. Alternatively, the seller can put the asset for sale without waiting to be approached by a buyer. The bidder’s decision to communicate his interest reveals some information about his valuation. In “common-value” auctions, such as battles between financial bidders, it disincentivizes bidders from approaching the seller. In contrast, in “private-value” auctions, such as battles between strategic bidders, the effect is the opposite. Unraveling occurs in the pure “commonvalue” auctions: no bidder ever approaches the seller, and the auction, if occurs, is seller-initiated. In contrast, equilibria in “private-value” auctions feature both sellerand bidder-initiated auctions. A number of implications about the relation between the initiating party, bids, and auction outcomes are derived and linked to empirical evidence on auctions of companies. ∗Preliminary and incomplete. We thank Engelbert Dockner (discussant), Arthur Korteweg, Nadya Malenko, Konstantin Milbradt, Stephen Ross, Antoinette Schoar, Merih Sevilir (discussant), and Vladimir Vladimirov for helpful discussions, as well as seminar participants at University of Amsterdam, Massachusetts Institute of Technology, and participants at the 2012 Chicago Booth Junior Symposium, the 2013 ASU Sonoran Winter Finance Conference, and the 2013 EFA Annual Meeting for useful comments. Gorbenko: agorbenko@london.edu. Malenko: amalenko@mit.edu.

Selling to Advised Buyers

In many cases, buyers are not informed about their valuations and rely on experts, who are informed but biased for overbidding. We study auction design when selling to such “advised buyers�?. We show that a canonical dynamic auction, the English auction, has a natural equilibrium that outperforms standard static auctions in expected revenues and allocative efficiency. The ability to communicate as the auction proceeds allows for more informative communication and gives advisors the ability to persuade buyers into overbidding. The same outcome is the unique equilibrium of the English auction when bidders can commit to contracts with their advisors.

Auction Design with Advised Bidders

This paper studies efficient and optimal auction design where bidders do not know their values and solicit advice from informed but biased advisors via a cheap-talk game. When advisors are biased toward overbidding, we characterize efficient equilibria of static auctions and equilibria of the English auction under the NITS condition (Chen, Kartik and Sobel (2008)). In static auctions, advisors transmit a coarsening of their information and a version of the revenue equivalence holds. In contrast, in the English auction, information is transmitted perfectly from types in the bottom of the distribution, and pooling happens only at the top. Under NITS, any equilibrium of the English auction dominates any efficient equilibrium of any static auction in terms of both efficiency and the seller’s revenue. The distinguishing feature of the English auction is that information can be transmitted over time and bidders cannot submit bids below the current price of the auction. This results in a higher efficiency due to better information transmission and allows the seller to extract additional profits from the overbidding bias of advisors. When advisors are biased toward underbidding, there is an equilibrium of the Dutch auction that is more efficient than any efficient equilibrium of any static auction, however, it can bring lower expected revenue.